May 11, 2010

PayPal Strikes Deal To Expand in China

EBay Inc.’s PayPal said it will partner with China UnionPay Co., China’s largest electronic-payment-service provider, to let Chinese consumers shop from overseas merchants, a move that opens a massive segment of the Chinese market for PayPal and presents new competition for eBay’s Chinese rival Alibaba Group.

PayPal also said it will double its work force in Asia to 2,000 by the end of the year.

A large portion of PayPal’s current business in China consists of transactions by eBay merchants based in China. The new partnership expands that business to China’s quickly growing consumer market, just as online shopping is taking off in China.

The deal highlights how eBay is using its fast-growing PayPal arm to take a second crack at the world’s largest market of Internet users. EBay largely withdrew from China in 2006, after losing out to rival auction site Taobao.com, a unit of Alibaba Group, which didn’t charge users for its service. Today, eBay’s Chinese marketplace business is run through a site called EachNet, but still has only a tiny share of the market.
[PAYPAL]

PayPal has been at the core of a wider turnaround effort by eBay, which has seen business slow in its core marketplace division. In the fourth quarter of last year, PayPal accounted for about a third of revenue. Analysts predict that PayPal, which benefits from a wider consumer shift toward online shopping around the world, could some day become eBay’s largest business.

Beginning in the third quarter, China UnionPay cardholders within China will be able to link their bankcard accounts with PayPal and access a network of nearly eight million online merchants world-wide, including U.S. retailers like Wal-Mart Stores Inc. and Zappos.com, a unit of Amazon.com Inc.

As a result, merchants around the world who accept PayPal payments and are willing to serve and ship to Chinese customers will be able to tap a base of millions of Chinese cardholders, most of whom don’t have, for example, a Visa card, though Visa Inc.-branded cards are also available in China.

Alan Tien, PayPal’s general manager in China, estimates there will be 150 million middle-class and affluent consumers and more than 300 million online shoppers in China by 2013. Though China is known as an exporter, “Chinese users will be a huge buying force,” he said in an interview.

PayPal says its partnership with China UnionPay will help users bypass a foreign-exchange regulation that limits cross-border transactions, essentially providing an online platform for China UnionPay, which it said “is already approved to conduct transactions by the relevant regulatory bodies in China.”

China UnionPay, which operates a bankcard-payment network, has relationships with hundreds of financial institutions in 90 countries and has issued 2.1 billion cards in 10 countries. Its partnership with PayPal leverages its core Chinese user base and PayPal’s merchant network to compete with e-commerce empire Alibaba Group, which has the leading market share by far in both online payment and online retail in China. Yahoo Inc. owns a 39% stake in Alibaba Group.

Still, the move won’t necessarily help PayPal build traction with Chinese shoppers who want to buy goods domestically. Currently, the largest destination for online shopping in China is Taobao.com, where most of the transactions are yuan-denominated sales between Chinese sellers and buyers. The site reported 200 billion yuan ($29 billion) of transactions on its site last year.

Transactions on Taobao are handled by Alibaba Group’s own online payment platform, AliPay, which JLM Pacific Epoch analyst Fiona Zhou estimates occupies 90% of China’s e-commerce payment market—far more than PayPal’s own Chinese payment platform, BeiBao, which is a wholly owned subsidiary of the company.

AliPay announced this week it has 300 million registered users and a daily transaction volume of over 1.2 billion yuan, and like Taobao, it doesn’t charge a commission for those transactions. It does, however, charge users a bank-processing fee. (PayPal charges a commission, but it says rates vary from country to country.)

Ms. Zhou at JLM Pacific Epoch says it is still too early for PayPal to see immediate benefits from the partnership, because the majority of goods purchased online in China are still domestic goods. “If you look at Taobao … overseas products still represent a small portion” of transactions, Ms. Zhou said.

Some U.S.-based e-tailers, too, are wary to sell products into China, because of shipping costs and the challenge of learning customs formalities.

Still, the appetite for products from overseas does exist. When Barnes & Noble Inc. unveiled the Nook in the U.S., Taobao sellers promising to carry the electronic readers back from the U.S. began taking pre-orders from Chinese consumers almost immediately.

China is PayPal’s largest market in Asia, where the company processed more than $6 billion in payments last year. The company estimates PayPal was used for $3.1 billion in transactions between foreign buyers and Chinese sellers in 2009, largely related to eBay purchases.

Write to Loretta Chao at loretta.chao@wsj.com and Geoffrey A. Fowler at geoffrey.fowler@wsj.com